The Federal Supreme Court of Iraq has ruled that paragraphs 2 and 3 of the Council of Ministers Decision No. 109 of 2020 and CoM Decision 211/2021.
Thomas CalvertPartner, Head of Corporate Commercial, Iraq
Omar ShariefTrainee Lawyer,Digital & Data
The Federal Supreme Court of Iraq (“FSC”) has ruled that paragraphs 2 and 3 of the Council of Ministers (“CoM”) Decision No. 109 of 2020 and CoM Decision 211/2021, regarding steps to establish the Iraqi National Oil Company (“INOC”) are invalid under Iraq’s constitution and repealed (the “FSC Decision”). The FSC decision appears to put back recent attempts to develop INOC, which could have significant implications for Iraq’s oil & gas sector, including, potentially, the evolution of upstream commercial arrangements and petroleum contract structures in Iraq.
National oil companies (“NOCs”) are oil & gas sector corporations that are majority owned by the respective national governments. Whilst some NOCs have issued shares publicly to raise capital and encourage competitiveness, such as Saudi Aramco, NOCs tend to be seen as symbols of national sovereignty and champions of state interests in the oil & gas sector. It is commonplace for oil & gas rich nations to set up national oil companies to help develop national oil & gas resources.
Some high-profile NOCs include, among others, Saudi Aramco, majority owned by the Saudi Arabian government, the Kuwait Petroleum Corporation, owned by the State of Kuwait, the National Iranian Oil Company, owned by Iran, Sonatrach, owned by Algeria and the Abu Dhabi National Oil Company, owned by the United Arab Emirates. Market observers tend to estimate that the combined output of NOCs account for one quarter of global oil production, as well as half of the world’s oil and gas reserves.
Various state-owned regional oil & gas companies exist in Iraq. However, given that the Republic of Iraq contains the world’s fifth largest proven oil reserves within its borders, with approximately 145 billion barrels of oil, it may therefore appear an outlier in that it has not also had a national oil company leading its oil & sector.
Some historical background to INOC is required to appreciate the context of the FSC Decision.
Historically, Iraq had an NOC (also called the Iraqi National Oil Company) (“Old INOC”). Old INOC was established in 1966 by the Iraqi state. Generally, it had powers to operate in most aspects of the oil & gas industry in Iraq, except for refining. As an operating entity in practice, Old INOC was fully operational by 1972. However, during the following two decades, Old INOC was broken-up into a series of regional state-owned companies, among them being North Oil Company, based in Kirkuk, and South Oil Company (now renamed Basra Oil Company), based in Basra. Other upstream state oil companies include Midland, Missan and Dhi Qar Oil Companies as well as SOMO, the state oil marketing company (established in 1998). These regional firms were affiliated to, and operated under, the umbrella of the Iraq Ministry of Oil (“MoO”), which has general powers to oversee the Iraqi oil & gas sector.
Law No.4 of 2018 (“INOC Law”) was published in the Official Gazette on 9 April 2018 and this established a ‘new’ Iraqi National Oil Company (“New INOC”). The INOC Law established New INOC and extended its powers into areas including administrative oversight of the Iraqi oil & gas sector and matters such as revenue distribution and contracting structures. It should be noted that there is no federal oil & gas law in Iraq, although since at least 2007, federal hydrocarbons legislation has been proposed from time to time. Arguably, the New INOC laid a framework for administrative and operational reforms in the Iraqi oil & gas sector.
The FSC however ruled in January 2019 that various articles of the INOC Law were unconstitutional, although it did not rule the entire legislation as invalid. Nevertheless, the articles struck down by the FSC, included those relating to the distribution of oil & gas sector revenues, the rights of local government and other important matters. This left the status and powers of the New INOC operationally and legally uncertain.
The FSC struck down five articles entirely and various other sub-articles. The articles struck down entirely include:
Article 3: which set out the general objectives of New INOC;
Article 8: which set out duties and powers of the board of directors of New INOC;
Articles 11 and 12: which transferred a significant degree of control over petroleum revenues from the Ministry of Finance to New INOC; and
Article 16: which disapplied certain existing laws and regulations in respect of their application to the Iraqi oil & gas sector.
The CoM proposed new legislation to bring the New INOC Law in line with the court’s ruling, but Parliament had yet to ratify the amendments. Given this, the CoM took certain steps, including the issuance of CoM Decision No. 109 of 2020 to set out administrative steps to support the development of New INOC, including the appointment of a Chairman of New INOC.
The FSC Decision has now ruled that such steps by the CoM are invalid and provisions of other existing laws should not be interpreted as to ‘compensate’ in respect of any missing or invalid articles of the New INOC law. To resolve this, it appears that new legislation would be required. Further, the FSC held the view that the CoM Decision, in seeking to do otherwise, had violated constitutional provisions that prohibit the ‘wasting of public funds’.
From a constitutional perspective, it is important to be note that FSC Ruling has not ruled the INOC Law itself invalid, rather it has ruled invalid the recent CoM Decisions that sought to implement administrative steps to bring the New INOC into operation in practice. What is evident is that to update the New INOC Law, or fully implement and establish a New INOC in practice, would require further legislation and therefore approval by the Council of Representatives (the Iraqi parliament). At the time of writing steps to fully form a new government in Iraq are still awaited. It appears that any new legislation, whether in regard to the New INOC Law, or a federal oil & gas law in Iraq, are questions that will await the new government.
For further information, please contact Thomas Calvert.
Published in November 2022
